Seadrill: Calm Before The Storm

| About: Seadrill Limited (SDRL)
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Summary

Volatility of Seadrill stock decreases.

I share my views on why this happened and discuss what could happen next.

The stock won't remain in a tight range forever.

Seadrill (NYSE:SDRL) shares have recently traded in the $3 to $4 range, and the volatility in the stock continues to decline. For battleground stocks like Seadrill, the periods of stabilization typically precede the periods of rapid movement. Let's see why Seadrill's stock is not as active as in previous months and what catalysts could move the shares in the remaining summer months.

Why the stock calmed down

Earlier, Seadrill did two debt-for-equity exchanges. The first one was done in May, when $55 million of principal amount of 2017 notes were exchanged for 8,184,340 shares of Seadrill.

The second one was performed in early June, when $50 million of 2017 notes were exchanged for 7,500,000 new shares. Both transactions have been almost identical and bondholders had to agree to a roughly 45% discount to face value of their bonds.

In my view, some investors viewed these transactions as a prelude to something bigger, but so far, this has not materialized, and, in my view, won't materialize any time soon.

There's no reason for Seadrill to hurry dealing with its bonds when it has not finalized the terms of restructuring with the banks. The bank debt is the biggest chunk of Seadrill debt and negotiations with banks will be decisive for the big deals with bondholders, not the other way round.

So, the "buy bonds back at a discount" catalyst did not really play out for Seadrill and both bulls and bears will have to show patience and wait until there are more clues on this topic.

The second reason why Seadrill' shares started to settle in a tighter range is the dynamics of the oil price. Oil failed to settle above $50, but there was no major correction as well.

Brexit has so far been mostly a one-day event for oil, as looming Norwegian strike provided some upside for the black gold. It also remains to be seen whether shale oil production can find support at current prices or if it will continue to decline.

The recent data from rig counts has been mixed, and it's too early to tell whether the rig count has really bottomed. This indecision translates into lower activity in Seadrill shares, which are viewed by many as an option on oil prices.

Upcoming catalysts

Two Seadrill rigs end their jobs in July - West Alpha, a semi-sub which currently works for Exxon Mobil (NYSE: XOM) and West Vencedor, a semi-tender rig working for Petronas.

Out of these two, West Alpha is the most important as it works at a really good day rate of $506,000. Seadrill's cash flow will be hurt anyway as there's no chance to contract West Alpha for any similar rate, but the absence of follow-on work will be a warning sign. Exxon Mobil is the healthiest client you can get, and if it does not do blend-and-extend deals at $50 oil, then who will?

West Phoenix, North Atlantic Drilling's (NYSE: NADL) rig, is rolling off contract with Total (NYSE: TOT) in September. North Atlantic Drilling's shares have been very active in recent days.

My explanation for this activity is that low float and low liquidity have allowed day traders to take stock in their hands and squeeze shorts. There's nothing fundamental behind the move, and the company is not viable as a standalone business. The absence of follow-on work for West Phoenix might speed up the restructuring talks for North Atlantic Drilling.

I believe that the story will end with Seadrill reabsorbing North Atlantic Drilling and I don't see how current North Atlantic Drilling's shareholders will get anything out of this as they stand behind so much debt.

The two remaining summer months will provide important details for the offshore drilling market puzzle. If oil stabilizes around $50 per barrel and no contracts will emerge, Seadrill's positions before end of the year negotiations with banks will weaken.

The opposite is of course also true - if $50 oil leads to new contracts, Seadrill will have more cards on the table when it restructures its debt.

I don't believe that $50 oil is sufficient enough to provide additional contract activity. If I'm right and nothing material shows up in summer months, Seadrill will likely break the support around $3 and head lower. If I'm wrong and contracts emerge, the recent highs around $4 level will be tested regardless of whether contracts change the fundamental picture for Seadrill.

At this point, I don't believe that Seadrill will reveal too much information on the ongoing restructuring talks when it reports its second-quarter results. I think that the conference call will be similar to the first-quarter earnings call - nothing more than promising to provide the details later.

All in all, I see the balance in Seadrill shares as fragile and almost every material event for the company may turn the tide for bulls and bears. I expect that Seadrill shares will return to volatile trading after a period of calmness. Longer-term, I remain skeptical on Seadrill and doubt that restructuring will be as beneficial for shareholders as the bull camp believes it will be.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may trade any of the abovementioned stocks.